First Linking Buyers and Sellers

Obstacles to Reform

Advocating for its members, the New York Stock Exchange contended that the central market system designed by the SEC would destroy its specialist system and adversely affect the profitability and stability of the exchange. The specialists, working in an open outcry auction, in effect conducted an auction at their post; floor brokers made deals among themselves in front of the post.

In addition, the specialist was charged with making a market in a particular stock if there was none. In that circumstance, the specialist would become a dealer and a party to the trade. While this role only occurred in a very small percentage of the daily trades, it remained an important economic aspect of the NYSE.(29)

While the self-interest of NYSE members was important, perhaps an even more significant obstacle to reform was the belief that the market itself promoted better competitive efficiency than did either SEC or exchange regulation. Concern among securities experts about the proper role of the SEC in regulating market structure, organization and form created a sense of caution.

Some SEC staff believed that the evolution of the markets required new and more fundamental regulation. It was not enough, they contended, merely to inform investors through the disclosure of information about companies. What was needed was assertive regulation to reform the institutions and structures of the market mechanisms, including the exchanges, to promote the efficiency, stability, liquidity, and capacity of the market in times of increasing volume of stock transactions. The automation and centralization of the market system seemed to be an obvious method for achieving those results.(30)

Congress gave the SEC specific authority in the 1975 Securities Act Amendments to "facilitate the establishment of a national market system for securities."(31) Rather than forcing the New York Stock Exchange into rapid and untested change, the SEC sought and received in the 1975 Securities Act Amendments Congressional authority to facilitate "the establishment of a national system for the prompt and accurate clearance and settlement of transactions in securities."(32)

Technological advances and the economic benefits that these advances created would prove to be even more of an impetus to the creation of the central market system than the SEC. Studies of the computerization process estimated that automation would eliminate errors that annually cost the securities industry over $100 million. By 1977, SRI International, a major computing firm, estimated that implementing an electronically linked central market would save the securities industry more than $130 million annually.(33)

George Simon

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